If there is one way to unnerve multi-national drug makers, China may have found it.

The fast-growing Asian nation recently amended its intellectual property law to allow its domestic pharma industry to make low-cost versions of medicines that are under patent protection. Specifically, the amended Chinese patent law allows Beijing to issue compulsory licenses to eligible companies to produce generic versions of patented drugs during state emergencies, unusual circumstances or “in the public interest.”
 

The move, which took effect in early May, signals an abiding interest in becoming a generic producer to the world, not just the local market. For instance, the change would also allow Chinese drugmakers to export such medicines to other countries if distribution would protect public health. Under World Trade Organization rules, compulsory licenses can be issued by countries in certain instances where life-saving treatments are deemed unaffordable for local populations. 
 

Interestingly, the action came just two months after the patent office in India, for the first time, granted a compulsory license to one of its own domestic drug makers, which sought to make a copycat of a patented medicine. The license was awarded to Natco, which can now make a generic version of a Bayer kidney and liver cancer medication called Nexavar, although only for domestic distribution. Bayer is challenging the ruling, but it is unlikely the genie will be put back in the bottle permanently.
 

The move by India “has emboldened other countries, such as China, to institute similar regimes,” Shamnad Basheer, a professor of intellectual property at National University of Judicial Sciences in Kolkata, India, told LiveMint. “All of this is reflective of a new intellectual property world order, where developing countries appear to be taking the lead.”
 

Indeed, the timing by the Chinese government reflects long-standing interest in how other countries have handled IP disputes with global drug makers and, specifically, the ramifications of issuing compulsory licenses. Significantly, the move by China will likely make it harder for multinational drugmakers to single out any one country for objections to how the Trade Related Intellectual Property Rights, or TRIPS, pact that was signed under the auspices of the WTO. 

Perhaps, the most notable example has been Thailand, which has issued several licenses for AIDS and heart medicines, among others, and in the process has sometimes sparked rows with different large drugmakers. One of the testiest moments occurred when Abbott Laboratories threatened not to sell several new drugs in Thailand after a license was issued for its Kaletra HIV medicine, although the drugmaker later backed down after enduring some rather negative public opinion.
 

The U.S. Trade Representative has regularly placed the Asian nation on its Priority Watch list, which is reserved for countries that engender IP concerns and is seen as a means of applying pressure when negotiating trade pacts. To what extent this distinction has proven difficult for Thailand is debate. In any event, China, India and Russia were also among the 13 countries that made the annual list. 
 

Of course, there are other considerations, but China has significant leverage simply because its domestic market is so attractive to multinational drugmakers, which are loathe to alienate the government at a time when further expansion into the country is de rigueur. Even though the global pharma industry has had long-standing concerns about the Chinese view toward IP, the biggest drugmakers will have to pick and choose its battles very carefully.
 

None of this should be surprising, though. For one thing, the Chinese government has belatedly acknowledged a growing AIDS problem and, consequently, has been eager to acquire HIV medications that are more affordable. Last year, Gilead Sciences agreed to share patent rights in a patent pool with generic drugmakers from several countries in return for a small royalty, but China was not part of the agreement and had to continue paying high prices for Gilead’s widely prescribed Viread pill.
 

Meanwhile, China has regularly encouraged the growth of its domestic pharma industry and a decidedly laissez faire attitude toward safety issues has provided cover for shoddy manufacturers that, consequently, were able to grow their businesses. This approach backfired somewhat, though, if only because the heparin scandal motivated the FDA and Congress to take a tougher stance toward unscrupulous Chinese suppliers of both finished medicines and active pharmaceutical ingredients.
 

In fact, the safety issue may plague Chinese ambitions — at least, to some extent — to supplant India as the world’s leading supplier of generics. Although the Chinese domestic industry may have sufficient infrastructure to produce any number of medicines should the government choose to issue compulsory licenses, concerns about quality may linger and give the Indian pharmaceutical industry — which has significant experience working with non-government organizations — a tactical edge.
 

But the safety issue is unlikely to leave multinational drugmakers feeling comforted. At the end of the day, if licenses are issued, Chinese domestic producers are well positioned to make lower-cost generics that could crowd out brand-name drugs, especially since there are so many companies making ingredients for domestic and global consumption. In other words, there is a formidable supply of needed parts that is always on standby and the government can be expected to wield this advantage like a club.
 

Consider, for a moment, the need for AIDS medications. As the recent amendment to the Chinese patent law became reality, Gilead reportedly offered China concessions, such as a substantial donation of Viread if the government continues to buy an equivalent amount. The Chinese government hinted that a license would be issued in order to get movement from the drugmaker. In effect, this was just old-fashioned haggling, but underscores China has learned from Thailand and others. 
 

Such episodes also underscore the tightrope that multinational drugmakers will be forced to walk. For years, these companies have professed to promote transparency as they sought to balance a stated commitment to providing access to essential medications with their intellectual property rights and revenue streams. In the process, however, the brand-name drugmakers engendered considerable resentment for their tactics.
 

Even a U.S. official was unimpressed. In a March 2009 cable from Warsaw, outgoing U.S. Ambassador to Poland Victor Ashe, a former Knoxville, TN, mayor and George W. Bush’s roommate at Yale University, sent a cable to Washington to update his views on the Priority Watch process as it was playing out. And he finished his summation by making an observation that is rarely seen in such communications.
 

“The Polish government has to make tough policy choices regarding which drugs to fund, and at what level. While pharmaceuticals companies often assert that they would be happy with a transparent process, even if it led to decisions not to fund their drugs, in practice they seem to resent all government measures aimed at cost containment, as these also inevitably limit drug companies’ sales,” he wrote at the conclusion of his cable.
 

Such conclusions reflect a way of doing business that is likely to fade thanks to the move by China. To cope, multinational drugmakers will be forced to think and act differently — and certainly do more than rely on a combination of bluster and U.S. diplomacy to protect their interests. Instead, global drugmakers may succeed by ramping up local manufacturing or sourcing products made in China that can yield competitive — or what some might call rational — pricing.
 

In the process, the multinational drugmakers can also create a wider distribution in what is already a huge and growing market. And by doing so, such a tactic may also help avoid the wrath of the Chinese government and avoid reasons for considering a compulsory license. To what extent global drug makers are willing to embrace such a posture remains to be seen. But clearly, their ability to dictate terms is fading rapidly. Threatening Beijing will prove harder than trying to push around Bangkok. 

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Ed Silverman is a prize-winning journalist who has covered the pharmaceutical industry for The Star-Ledger of New Jersey, one of the nation’s largest daily newspapers, for more than 12 years. Prior to joining The Star-Ledger, Ed spent six years at New York Newsday and previously worked at Investor’s Business Daily. Ed blogs about the drug industry at Pharmalot, at www.pharmalot.com. He can be reached at [email protected].